Europe

London Frets France's New Financial Clout

December 04, 2009

By Andrew MacAskill and Gavin Finch

(Bloomberg) — London financiers attacked the appointment of an ally of French President Nicolas Sarkozy to draft European Union rules for their industry, saying he risks undermining the capital's place as Europe's financial center.

The French appointee Michel Barnier, 58, is "definitely not known as an Anglophile," said Jon Moulton, 59, the venture capitalist who tried to buy carmaker MG Rover in 2000. "He will be adverse to the interests of the U.K. financial industry," Moulton said. "I wouldn't be at all surprised to see us becoming the main victim."

Bankers in London are turning on their European watchdog, underscoring their dismay at the prospect of ceding greater regulatory power to Brussels. Governments are boosting oversight of the industry after the EU's banks required more than $5.3 trillion of taxpayer aid during the credit crisis. Anglo-French rivalry, dating back beyond the Norman conquest of England in 1066, resurfaced after Sarkozy said the decision left the British as "the big losers" in an interview with Le Monde.

Sarkozy's "hostile" comments that Barnier would curb "Anglo-Saxon" finance will damage the European Union, said Angela Knight, chief executive officer of the British Bankers' Association, a London-based lobby group representing 260 financial companies.

Barnier's appointment revealed "a witch's brew of French and German desires to reduce the importance of London as a financial center and bring operations of their banks home" from the British capital, said Philip Keevil, 63, senior partner at investment bank Compass Advisers LLP and a former head of Citigroup Inc.'s European mergers team.

'I'm Pragmatic'
"I'm pragmatic, I'm ready to work with everyone," Barnier said at a press conference in Paris last week. "You don't need to convince me of the importance of London as a financial center." The commissioner-designate also pointed out that he had appointed a British official as his deputy.

A strong financial center in London is in Europe's interest, Barnier told the French daily La Tribune on Dec. 3. He will use EU internal markets powers to increase growth, competitiveness and employment in the region, the newspaper said. Barnier wasn't available to comment, according to his office in Brussels.

"Do you know what it means for me to see for the first time in 50 years a French European commissioner in charge of the internal market, including financial services, including the City?" Sarkozy said in a speech in Seyne-sur-Mer, France, on Dec. 1. "I want the world to see the victory of the European model, which has nothing to do with the excesses of financial capitalism."

'Undermined the EU'
"Sarkozy must surely recognize that he has undermined the EU with his statements and put a question mark over the impartiality of his nominated commissioner," Knight said in a speech to the Worshipful Company of International Bankers in London on Dec. 2.

U.K. Chancellor Alistair Darling responded on Dec. 2 by telling Barnier to tread carefully with rules to police markets, saying Europe will suffer if London's position is hurt. Prime Minister Gordon Brown persuaded Sarkozy to cancel a planned meeting in London this week, which would also have involved Barnier, because Downing Street believed it would have deepened British suspicions, the Financial Times reported today.

"The appointment is a gut-wrenching decision, I mean truly awful," said David Buik, 65, a markets analyst at BGC Partners, who has worked in the City, London's main financial district, for 47 years. "It is the final humiliation for the U.K. since the start of the banking crisis."

"That means regulatory oversight from Brussels, capital requirements, caps on compensation, and maybe even Glass-Steagall type legislation to prevent deposit-taking institutions from engaging in so called risky trading," he added.

London-based hedge fund managers and private equity dealmakers say an EU draft directive that's supported by the French and German governments will impose greater regulation and risks damaging their industries, according to their industry lobby groups. The rules would cost pension plans, hedge funds and private equity firms at least 4.6 billion pounds ($7.6 billion), the U.K.'s Financial Services Authority on Oct. 16.

"The currently proposed rules on hedge funds and private equity contain sections that are little more explicable than the Book of Revelation," Moulton said.

London's 'Vital Role'
Britain is home to least 80 percent of Europe's $400 billion in hedge-fund assets and about 60 percent of its private-equity firms.

London's financial role is vital to both the British and European economies, according to the City of London Corporation's Web site. The U.K. capital registers foreign exchange turnover of $1.68 trillion daily, a 35 percent of global share, along with 22 percent of the global foreign equity market, 70 percent of all eurobond turnover and 18 percent of cross-border lending, according to the corporation.

Barnier was picked to lead a push for more bank regulation as part of a new European Commission team announced last week. He will be responsible for enforcing the EU's internal-market rules across the continent for the next five years. As Internal Market and Services Commissioner, any proposals Barnier makes require the approval of EU governments.

'He'll Be Sensible'
Not everyone in London considers Barnier a threat. David Walker, a senior adviser at Morgan Stanley, author of a U.K. government review on corporate governance published last week, said the concerns were overblown.

"It's a shame that there's all this speculation about victory for the French, defeat for the British," said Walker, 69. "I've every reason to believe he'll be very sensible and will see financial services based in London as very positive for the whole of Europe."

Even so, the U.K. government's role in agreeing to Barnier's appointment has been attacked by the opposition Conservative party. William Hague, the party's foreign affairs spokesman, wrote to Foreign Secretary David Miliband asking whether the government agreed to Barnier's appointment in a deal to win French support for Catherine Ashton, Britain's nominee for the post of foreign policy commissioner.

With a British election due within the next six months, the conflict between Europe and the U.K. may intensify if the Conservatives win, said Philip Whyte, senior research fellow at the Centre for European Reform.

"The U.K. and other EU countries are heading for a car crash," Whyte said. "When a new government comes into office in the U.K. looking for a fight to pacify their eurosceptic membership, they may turn this into some sort of totem."

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net